The article discusses the importance of understanding preferred stock for startup founders. Venture capitalists (VCs) often require preferred stock with special privileges to mitigate their risks. Preferred stock, unlike common stock, provides preferential treatment to investors in certain situations. The most significant aspect is the liquidation preference, which ensures that investors get paid first if the company fails or sells for less than its valuation. The article emphasizes the need for founders to consult with experienced advisors before negotiating these terms. While deal terms have become more standardized and tend to favor founders, later financing rounds can become complex, potentially resulting in dilution of equity for employees and founders. It warns against the potential pitfalls of participating preferred shares, where investors receive their initial investment back and additional shares proportional to their ownership stake, leading to less for common shareholders. Founders should be cautious about giving away too much control and consider the long-term consequences of their decisions. Ultimately, the article advises founders to focus on building a great business and hitting milestones, as it increases their leverage during negotiations.
What Startup Founders Should Know About Preferred Stock By Lewis Hower
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